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Good News is Bad News: Leverage Cycles and Sudden Stops

Ozge Akinci () and Ryan Chahrour

No 866, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We show that a model with imperfectly forecastable changes in future productivity and an occasionally-binding collateral constraint can match a set of stylized facts about Sudden Stop events. "Good" news about future productivity raises leverage during times of expansions, increasing the probability that the constraint binds, and a Sudden Stop occurs, in future periods. During the Sudden Stop, the nonlinear effects of the constraint induce output, consumption and investment to fall substantially below trend, as they do in the data. Also consistent with data, the economy exhibits a boom period prior to the Sudden Stop, with output, consumption, and investment all above trend.

Keywords: News Shocks; Sudden Stops; Leverage; Boom-Bust Cycle (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 G15 (search for similar items in EconPapers)
Date: 2014-12-05, Revised 2015-04-30
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Related works:
Journal Article: Good news is bad news: Leverage cycles and sudden stops (2018) Downloads
Working Paper: Good news is bad news: leverage cycles and sudden stops (2015) Downloads
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